Agri-environmental program compliance under heterogeneous conditions
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Heterogeneity of agricultural
landscapes may necessitate the use of spatially
targeted instrument combinations to implement the
social optimum. But compliance with these policies
may require costly enforcement. This paper
examines the design of agri-environmental policies
featuring two of the most commonly used
instruments, reductions in fertilizer application
rates and installation of riparian buffers. While
compliance with buffer strip requirements is
verifiable at negligible cost, fertilizer application is
only verifiable through costly monitoring. We
derive optimal subsidies for fertilizer reduction and
buffer strip set-asides and enforcement strategies
for the cases of low and excessive monitoring costs.
An empirical simulation model suggests that
enforceable policies can come close to replicating
socially optimal crop production, nitrogen runoff,
and overall welfare without requiring increases in
overall subsidy expenditures, at least under
conditions characteristic of Scandinavia.